The Chlor-alkali Group delivered strong profits, accounting for 40.7% of the company's consolidated net sales.

Snapshot

The Chlor-alkali Group comprises Tosoh’s chlor-alkali, urethane, and cement operations. It supplies the international chlor-alkali industry with raw materials that are vital in a variety of products common in everyday life.

The raw materials naphtha and salt underpin the Chlor-alkali Group’s materials and products, which are manufactured in the largest chlor-alkali commodity operation in Asia: Tosoh’s fully integrated Vinyl Isocyanate Chain. The materials and products are then either sold to customers or channeled back into the chain as feedstocks.

MDI is an aromatic diisocyanate key as a feedstock in the production of polyurethane-based products, and a popular product in its own right. Tosoh supplies MDI to manufacturers domestically and internationally. MDI and TDI, another aromatic diisocyanate, result in such products as elastomers, coatings, foams, and adhesives. HDI is an aliphatic diisocyanate used in specialty products, such as high-performance paints and adhesives.

The integration of the vinyl chain at the Yokkaichi Complex and the vinyl isocyanate chain at the Nanyo Complex has made Tosoh a formidable presence in the international chlor-alkali market. That integration makes possible the efficient bulk manufacturing of commodities for use in Tosoh’s and other manufacturers’ products.

Tosoh’s cement operations, also overseen by the Chlor-alkali Group, consist of the manufacture of cement and the consignment of the production output to Taiheiyo Cement Corporation, Japan’s largest cement manufacturer. Tosoh collects by-products, including coal ash and slag, from its operations and other, outside sources that the Chlor-alkali Group incorporates into its cement manufacturing process. This reduces costs considerably and contributes significantly to the communities and the environments where Tosoh operates.

Group Performance

Improved Profitability

Net sales by the Chlor-alkali Group in fiscal 2018 increased 19.8%, to ¥335.0 billion (US$3.2 billion) from the previous year. This accounted for 40.7% of the company’s consolidated net sales, up from 37.6%, in fiscal 2017. Operating income improved 39.0%, to ¥66.6 billion (US$627.1 million), constituting 51% of consolidated operating income and resulting in an operating margin of 19.9%, an increase of 2.8 percentage points over fiscal 2017.

MDI export prices rose. Modest delays in competitors' expansion plans led to continued tightness in supply and demand.

Developments

Capital Investments

The Chlor-alkali Group is raising the efficiency of the coal-fired electric power generation plant at the Nanyo Complex. It will also work to increase the Nanyo Complex’s ability to use resources such as warm water, waste acid, and chlorine in the production of bromine with the goal of becoming the top manufacturer in Asia. And it will consider increasing its production capacity for caustic soda, VCM, and PVC paste to capitalize on increased demand in Southeast Asia and India.

Also in the works for the Chlor-alkali Group are improvements to its logistics infrastructure to boost competitiveness. The group will improve jetties and tanks and optimize its electricity balance. In November 2019, it will begin construction for the installation of a new naphtha cracking furnace at the Yokkaichi Complex. And in summer 2020 it will renovate the older cracker at that complex.

Positioning

Vinyl Isocyanate Chain

Tosoh’s truly powerful competitive advantage is its integrated production capability. The company’s vinyl isocyanate chain combines the vinyl and isocyanate processes. This facilitates the efficient, high-volume production of raw materials to be used either as feedstocks fed back into the chain to make more raw materials or finished products internally by Tosoh and its group companies or to be sold to external customers for use in their finished products. No other manufacturer in Asia possesses such a comprehensive capability.

The vinyl side of the chain begins with the electrolysis of salt to generate chlorine, caustic soda, and hydrogen and with the steam cracking of naphtha to produce ethylene, carbon monoxide, and benzene. Some of the chlorine produced is then reacted with ethylene and hydrogen chloride to make ethylenedichloride (EDC), while the remainder of the chlorine is used in manufacturing other chlorine products. EDC can be used to produce ethyleneamines by combining it with caustic soda, or it can be converted to vinyl chloride monomer (VCM), which, in turn, can be converted into PVC resins.

On the isocyanate side of the chain, the benzene that the naphtha cracking process yields is combined with hydrogen and ammonia to create aniline. This aniline is then mixed with formalin and with the chlorine and carbon monoxide generated by the vinyl chain to produce MDI, a raw material crucial in the production of polyurethanes. Hydrogen chloride, a by-product of the MDI manufacturing process, is fed back into the vinyl chain to generate additional EDC.

Sustained, safe operation of the vinyl isocyanate chain is essential in supporting not only the manufacture of the Chlor-alkali Group’s urethane, chemical, and cement products but also of the Petrochemical Group’s and the Specialty Group’s products and, moreover, of Tosoh’s external customers' products. External customers for Tosoh’s commodity and specialty products rely on Tosoh for a stable supply of consistently superior-quality products regardless of economic, environmental, or other conditions. The dependency, meanwhile, of Tosoh Group PVC makers in Southeast Asia for a stable supply of raw materials from Tosoh’s vinyl isocyanate chain extends the effectiveness and efficiency of the chain, greatly enhancing its value.

Urethanes

The Chlor-alkali Group’s Urethane Division recorded a strong performance in fiscal 2018, primarily on the strength of increased prices for isocyanate. However, concerns persist regarding activities by competitors to increase production capacity, fluctuations in the prices of raw fuel and other materials, changes in exchange rates, and risks related to the Chinese market.

Urethane market conditions are expected to decline in the year ahead. But the Urethane Division will continue developing high-value-added MDI products and strengthening its functional urethane to contribute to stabilizing and maximizing profits. The division will also strive to operate at full capacity in manufacturing to maintain vinyl isocyanate chain operations and in sales to boost revenue.

Among the division’s aims is to strengthen its business foundation by consolidating relationships with its domestic customers and by expanding the number of its specialty MDI products. The Urethane Division is also debottlenecking in phases to raise its production capacity domestically and it is bolstering its presence in China through a polyurethane sales and manufacturing base established in Shanghai’s Jinshan District in March 2017. It will similarly fortify its global sales structure. As of November 2017, MDI sales operations have already begun at Tosoh India.

The Urethane Division aims for a 50% share of the domestic market by 2022 by, in part, expanding its retail sales of HDI and HDI derivatives. It will also apply new technologies to the development of specialty and high-quality products that distinguish it from competitors. The division’s ongoing debottlenecking at its Nanyo Complex plant will also help it respond to growing market demand.

Chlor-alkali

Demand for PVC worldwide grew 44.0 million metric tons in fiscal 2018. The growth was driven by Asia, which accounts for over 60% of global PVC demand. The forecast for fiscal 2019 calls for continued growth in demand for PVC, again led by Asia. The most significant growth is expected in India and in Southeast Asia. PVC demand increased 3%, buoyed by robust investment in real estate and agricultural infrastructure. Domestic demand is anticipated to continue in fiscal 2019, albeit at a slower pace. Few production capacity expansion projects are anticipated in Asia and elsewhere through 2020, so it is expected that increased demand for PVC will be absorbed by existing sources.

The global caustic soda market showed improvement in fiscal 2018 and is expected to continue to grow at 3% annually amid continued tight supply and demand. Production capacity expansion plans are limited, resulting in demand overtaking supply.

Over the past several years, the Chlor-alkali Group has strengthened its operational foundation, minimized its power consumption and raw material costs, and operated at full capacity. The success of its efforts was evident in the significant increases in its net sales and profits in fiscal 2018. Going forward, the Chlor-alkali Group will examine expanding its chlor-alkali manufacturing capacity, partly by renovating and enlarging facilities at the Nanyo and Yokkaichi Complexes. The Chlor-alkali Group’s objective is to ensure production capacity to meet forecasted increases in demand particularly in Asia.

Cement

The Chlor-alkali Group will ensure stable cement production by implementing planned investments to refurbish and replace aging facilities. It will also gradually increase its use of clay substitutes to permanently phase out natural clay. Among its planned capital investments are increases for substitute fuels to reduce its need for coal. As well, the group intends on increasing revenue from recycling waste collected from external sources.

Domestic demand for cement is expected to continue at its present level through fiscal 2019. It will be driven by construction for the 2020 Tokyo Olympic and Paralympic Games, for the Chuo Shinkansen (bullet train) line, for the extension of the Hokkaido and Hokuriku Shinkansen lines, and for the reconstruction work following the Kumamoto Earthquake. Cement sales volume, however, is not expected to grow much because of anticipated schedule delays due to labor shortages, increased personnel costs, and a shift from reinforced steel to steel to shorten the duration of construction projects.

In fiscal 2018, Tosoh achieved 1.24 million metric tons in cement production and sales volumes. This was a first since its transition to single-kiln operations in April 2011.

Following the completion of construction projects related to the 2020 Tokyo Olympic and Paralympic Games, it is thought that cement demand in Japan will continue because of an anticipated backlog of large projects. In particular, infrastructure projects involving the repair and renewal of aging roads and bridges nationally are forecast to drive demand.

Forward-Looking Statements: Annual reports contain estimates, projections, and other forward-looking statements, which are subject to unforeseeable risks and uncertainties. Readers should understand that Tosoh's business and financial results could differ significantly from management's estimates and projections.

For reference purposes only, US dollar amounts have been translated, unless otherwise indicated, from yen at the rate of ¥106.24 = US$1, the prevailing exchange rate at the end of the fiscal year under review.

Tosoh Corporation's 2018 fiscal year covers the period from April 1, 2017, to March 31, 2018.